Three Reasons Small & Mid-Cap ETFs Are Outperforming

Small cap and mid-cap stocks and ETFs have been known to be at the forefront of growth during times of economic recoveries, and over the past few months, they have been leaving large caps in the dust. 

In fact, historical data shows that small-cap stocks have outperformed their large-cap counterparts during three of the past five recessions, while mid-cap stocks have outperformed their large-cap counterparts in each of the past five recessions.  A major reason behind this outperformance is due to the flexibility and nimbleness of small and mod-cap companies.  These companies are generally able to quickly ramp up headcount and production as the economy improves, which further enables them to take advantage of a growing environment and produce gains in revenue and earnings. 

A second force which enables small and mid-caps to outperform large-caps is the inherent performance boost they witness when mergers and acquisitions activity increases as valuations become favorable and larger companies with excess cash on their balance sheets look for ways to expand their businesses. Lastly, small and mid-cap companies generally are riskier than large-caps and therefore witness higher returns and are more susceptible to positive price support in the early stages of an economic recovery.

Some ETFs influenced by this phenomenon include:

  • PowerShares Dynamic Small Cap (PJM), which is up 27% over the last year.
  • Vanguard Small-Cap ETF (VBR), which is up nearly 25% over the last year.
  • S&P Mid-Cap 400 SPDR ETF (MDY), which is up nearly 28% over the last year.
  • iShares Russell Midcap Index Fund (IWR), which is up nearly 26% over the last year.

Disclosure: No Positions

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